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Businesses in East African region frustrated by dollar scarcity

Investors are fleeing thebusiness in East African region due to the dollar’s scarcity, volatility, high interest rates, and easy access to credit.

According to the East African Business Council’s (EABC) Report on the Ease of Doing Business in the East African Community (EAC) 2023, the region’s firms are at risk from unregulated foreign exchange markets at the border, legal tax appeals and judgements, and protracted customs valuation procedures.

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The 252 businesses who responded to the study identified several difficulties with trade finance, including the lack of dollars, excessive interest rates, and restricted access to loans.

“The dollar is putting pressure on local currencies and so our currencies are losing value making it difficult to do business,” said John Kalisa, chief executive of the East African Business Council.

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“Our dollar reserves are dwindling, meaning that we import more than what we export so we are in a trade deficit. The only way to get out is to improve our productivity.”

Last week, commercial banks quoted the Ugandan shilling at 3,735/3,745 against the US dollar. Despite the overhaul of the interbank forex market in March, the Kenyan shilling extended its losses against the US dollar in September, exceeding its overall depreciation from the previous year. The local currency has recorded a 21.6 percent decrease against the dollar, dropping from Ksh120.34 on September 12 last year to Ksh146.36 as of this Monday.

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As per the Bank of Tanzania’s data, the indicative exchange rates as of Thursday reveal that the country’s shilling has reached a new historic low, averaging 2,428.7 against the US dollar.

“The pressure coming from the dollar sends a message to the regional bloc that there is a need to improve production especially in agriculture and productivity,” said Kalisa.

Even after the harmonization of the Common External Tariff, there is a lack of consistent implementation of the CET across the East African Community (EAC) partner states. The EABC report additionally highlights significant challenges in the region, including high trading costs stemming from difficulties in conducting cross-border payments, the presence of multiple taxes and fees, local government levies/cess at border crossings, and harassment by government regulatory authorities primarily focused on tax collection without recognizing the importance of facilitating free trade across borders.

The report offers several recommendations, including the need for partner states to enhance the ease of doing business through simplified and coordinated legislation pertaining to business registrations, access to finance, contract enforcement, and tax payment processes.

Furthermore, companies have cited a lack of adequate information regarding government policies and regulations as a hindrance to conducting business within the EAC.

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